Trade associations exist in part to promote competition, serving as agents of economic growth and sustainability for the industries they represent. However, trade associations—which are by definition groups of competitors—are particularly susceptible to allegations of antitrust abuse.
When one hears “antitrust,” one may think of high-profile corporate cases, such as the cases involving Microsoft several years ago, when the software giant was accused of monopolization by the federal and state antitrust enforcers. However, associations are just as vulnerable as the large corporations that have found themselves accused on antitrust violations on the front page of every major newspaper. As one former chief of the Antitrust Division of the U.S. Department of Justice underscored, "[t]he members of a trade association, singly and as a group, are sitting on an antitrust powder keg!" How so? Consider the following scenario.
Simple Conversation or Slippery Slope?
At your association's annual kickoff cocktail party, two former colleagues who now work for different competitors come over to say hello. Quickly, the conversation turns to the smaller bonuses each of them received this year. All three of you discuss the problems that the industry is facing, and one of your competitors complains about downward-pricing pressure from customers. One competitor says to no one in particular, "If only we didn't have to cave in to our customers." The other competitor smiles and looks to you for a response. What do you do? If you are smart, you immediately excuse yourself from the discussion. Why? Because this is the type of communication that could get you into trouble under the antitrust laws.
Under the antitrust laws, it is not necessary for the agreement to be explicit; an agreement may be inferred from actions taken in parallel without an actual express verbal agreement, handshake, or writing. And here’s where initially innocuous conversations can become lethal. Comments made in an informal environment may be used as one type of proof of an agreement, even though the parties' subsequent actions were taken for sound business reasons.
The U.S. antitrust laws of principal concern to companies and individuals that participate in association activities are Section 1 of the Sherman Act and Section 5 of the Federal Trade Commission Act. These laws prohibit all contracts, combinations, and conspiracies that unreasonably restrain trade. Under Section 1, only "concerted" action or "agreements” are illegal This means that, for the most part, as long as a company is making independent business decisions, it should not have exposure under the antitrust laws. Antitrust concerns arise when companies coordinate or agree on certain conduct. The example above illustrates a classic prelude to price fixing, but there are other types of potentially problematic conduct that associations need to understand as well.
Recent Antitrust Cases Against Associations
Following three years of investigation and negotiation, the Department of Justice (DOJ) filed a lawsuit last fall against the National Association of Realtors (NAR), charging that NAR’s policy allowing its members to withhold Multiple Listing Service (MLS) property listings from online brokers violated Section 1 of the Sherman Act. DOJ asserts that the policy will restrict the discounting of sales commissions and put online competitors at a disadvantage. According to DOJ, the NAR policy “denies brokers using new technologies and business models the same benefits of MLS membership available to their competitor brokers, suppresses innovation, discourages competition on price and quality, and prevents new, efficient competitors from entering into the marketplace—all to the detriment of consumers.” In response, NAR contends that the policy ensures that its brokers have an incentive to use the MLS. If DOJ forces revocation of the policy, NAR argues that it will result “in less competition in real estate services, higher costs, [and] less availability of listing information, the very outcome [the Department of] Justice seeks to avoid.”
The government is also targeting NAR's membership rules, which deny access to the MLS listings to brokers operating referral services for a fee. (Certain types of membership restrictions may raise antitrust concerns. The top-five antitrust pitfalls for associations are discussed later in this article.) NAR’s membership rules effectively prevent two brokers from working together so that one is responsible for attracting new business and educating buyers while the other broker guides the buyer through the actual purchase of the property.
Another now-settled case demonstrates that even when plaintiffs lose in court, the time and cost to defend the case, as well as the negative effect on the association’s reputation, are all significant concerns. This case underscores that even when an association believes it is acting in a procompetive manner, potential plaintiffs (or antitrust law enforcers) may view the conduct through a very different lens.
In 2002, a research fellow and two resident physicians filed a class-action suit in federal district court against two medical associations and 29 hospitals that sponsor residency programs, alleging, among other things, that the defendants engaged in an anticompetitive conspiracy in violation of Section 1 of the Sherman Act. Specifically, the plaintiffs alleged that the National Resident Matching Program, a nonprofit corporation managed and operated by the defendant American Association of Medical Colleges (AAMC), conspired with the defendant hospitals to “displace competition in the recruitment, hiring, employment, and compensation of resident physicians, and to impose a scheme of restraints which have the purpose and effect of fixing, artificially depressing, standardizing, and stabilizing resident physician compensation and other terms of employment.”
Two years after the lawsuit was filed, Congress granted an antitrust exemption for graduate medical education residency matching programs. On August 12, 2004, the district court dismissed the plaintiffs’ claims, concluding that the recently enacted legislation barred evidence of anticompetitive conduct through the Matching Program and that the plaintiffs' claims were inextricably linked with the Matching Program. Nevertheless, the decision left open the possibility of pursuing a price-fixing claim not related to the Matching Program. It should be noted that the court acknowledged Congress’ findings that the Matching Program provided procompetitive benefits and that the Matching Program was a valuable placement system created with “a desire for efficiency, for fairness, and for protection of students’ early years of medical school.”
Top-Five Antitrust Pitfalls for Associations
In each of these association cases, one can perhaps appreciate both sides: the association trying to promote the interests of its members, and the antitrust enforcers trying to promote fair and reasonable competition. To minimize antitrust risk, association leaders need to understand the types of conduct that raise the greatest antitrust concerns in the association context.
1. Price fixing. In the hypothetical example offered at the beginning of this article, it would take more than this isolated encounter to prove price fixing. In order to have a price-fixing violation, competitors must agree to control or stabilize prices or agree to the terms and conditions of sale. In most cases, price-fixing agreements are not explicit but are proven through circumstantial evidence and are considered unlawful under the antitrust laws regardless of the reasons why it is undertaken or the effect on competition (per se unlawful).
For example, this April, an Indianapolis federal grand jury indicted an Indianapolis ready-mixed concrete producer and three of its executives for participating in a conspiracy to fix the price for ready-mixed concrete sold in the Indianapolis metropolitan area. Including this indictment, three companies and eight individuals have been charged as a result of an ongoing investigation conducted by the DOJ into the industry. In addition, DOJ has obtained fines totaling more than $30 million. The defendants are charged with attending and participating in meetings among competing ready-mixed concrete producers during which agreements were reached regarding the price at which the alleged coconspirators would sell ready-mixed concrete and the discounts that the alleged coconspirators would offer on ready-mixed concrete. Why should an association care about this classic example of price-fixing? It’s all too easy to imagine that the initial discussion leading to this agreement among competitors could have occurred at an association-sponsored function.
2. Limiting competition. Had the competitors in the hypothetical example at the beginning of the article agreed not to solicit each others' customers or sell within each others' territories, they would have violated the antitrust laws through a market-allocation scheme. There are various other methods of limiting competition, such as agreeing to exclude nonmember competitors from the association without a reasonable, objective reason and process for doing so, assuming such exclusion has an effect on competition (see discussion below), boycotting or refusing to deal with particular suppliers’ customers, or bid rigging. In addition, an association cannot use its code of ethics to impose restrictions on members’ ability to compete, such as through prohibitions on advertising of prices, quality, or other factors. Like price fixing, many of these activities are per se unlawful, which means that on its face the conduct is illegal regardless of the business justification for the conduct or the actual impact on competition.
The simplest way to avoid violating the antitrust laws through limiting competition is to simply not engage in any of these activities or discussions. If any such proposals surface during association meetings, the meeting chair should immediately end the discussion, remind the attendees of the antitrust issues, and contact legal counsel immediately. As a preliminary matter, agendas should be prepared for all trade or professional association meetings, preferably reviewed by antitrust counsel, and strictly followed. In addition, if you are unsure if a particular activity under discussion at a meeting or other association event raises antitrust concerns, you should refrain from further discussions and contact legal counsel. Finally, it is always a good idea to have antitrust counsel present at association meetings if there is a potential for discussion of issues that touch on any prohibited conduct.
3. Information exchanges. Trade and professional associations frequently engage in gathering and disseminating industry statistics and other types of information. Structured properly, an information-exchange program is a legitimate (and procompetitive) function of a trade or professional association. Compilations of reasonably available public information generally will not run afoul of the antitrust laws. The association must have a legitimate business purpose to analyze otherwise confidential information; the information exchange should not be a way for the association to act as a conduit to share information that competitors could not otherwise share directly. A number of precautions will minimize the antitrust risk of information exchanges:
- The data collected should be historical only. Present and future pricing data, for example, could be used for illegal price fixing.
- The data should be collected by association staff or other independent third-party collectors.
- The data submitted should be kept confidential and presented only in aggregated form with no individual members identified. No member should be given access to the data submitted by another member.
- Member participation in providing information must be voluntary.
- Each member should separately analyze the data and make independent business decisions based on the data.
4. Standards setting. Developing industry standards is an acceptable way for professional societies and trade and professional associations to enhance safety, quality, and functional uniformity. Association standard setting may violate the antitrust laws, however, when its purpose is to restrict competition, restrict entry into the industry, deter innovation, or otherwise inhibit the ability of nonparticipants to compete. For example, in 1998, the Supreme Court found that a member of a fire-safety association violated the antitrust laws by influencing the association to adopt a biased safety code to benefit its product and disfavor competing products.
5. Membership restrictions. Trade and professional associations are free to adopt clear, reasonable, and objective standards for membership. However, assuming that membership in the association is essential to compete in the industry and the membership exclusion affects competition, denial of membership to an eligible applicant may raise antitrust issues. Similarly, denial of access to association benefits or services to nonmembers may implicate the antirust laws if the benefits or services are essential or material to compete effectively. In that situation, the association may be required to provide access to those benefits necessary to effectively compete. The association is permitted to charge nonmembers a fee for services that are free to association members or charge a higher fee for nonmembers.
Expelling a member from the association also may raise antitrust issues. Often, members faced with expulsion threaten to sue the association for antitrust violations, arguing that membership is necessary to compete in the industry. To avoid raising antitrust concerns related to membership restrictions, your association should clearly articulate the reasonable, objective criteria for membership. In addition, if trade or professional association membership is essential to compete, the association should allow nonmembers access to its benefits and services for a reasonable fee.
Avoiding Antitrust Problems
Following the advice above will go a long way in reducing your association's antitrust risks, but there are still other antitrust pitfalls that your association may face. To further minimize your trade or professional association's risks, your members must understand the antitrust laws and the types of activities that implicate them. To this end, your association should have an antitrust-compliance program in place. The level of intensity of your compliance program may vary based on a number of factors such as the antitrust risks inherent in your industry; whether there is a history of antitrust problems in the industry or by members; the size of your trade or professional association (if your membership accounts for a significant percentage market participants, it likely has market power—without market power, only per se offenses violate the antitrust laws); and the scope of the association's activities. Antitrust-compliance programs may be very basic (reading of an antitrust statement at the beginning of each meeting to remind members of the antitrust laws) or comprehensive (requiring members to enroll in antitrust training and ensuring legal counsel to be present at all meetings). Antitrust counsel can help you assess your association's antitrust risks and fashion an appropriate compliance program.
Dealing with a government antitrust investigation or a private antitrust lawsuit is expensive, time consuming, and distracting. An investigation or lawsuit can seriously damage the reputation of your trade or professional association, its members, and individuals. It is important to emphasize that penalties, damages, and distractions are avoidable by understanding in very basic terms what the antitrust laws require and by consulting with legal counsel whenever you are in doubt. After all, when you make the headlines, you want it to be good news.
This article is published by Venable LLP. Venable publications are not intended to provide legal advice or opinion. Such advice may only be given when related to specific fact situations. © Copyright by Venable LLP 2006.
This article was also published in Associations Now.